The bank and thrift regulators have spent almost two years trying to "improve" Community Reinvestment Act regulations. Their first attempt was a flop, and their second proposal is only marginally better.
The problem is not lack of effort or good intentions, as those qualities appear to be in ample supply. The problem the reformers face is that there is not much in the current CRA regulations that needs fixing.
The current CRA regulations were the product of months of careful deliberations in 1978 by the staff and board members of the various bank and thrift regulatory agencies. Community groups, Congress, the administration, and bankers were deeply involved in the process.
The political climate during that period was hardly favorable to the banking industry.
Democrats, not the party of choice for most bankers, were in firm control of the White House, the Senate, and the House of Representatives,
The banking industry was reasonably robust, thrifts appeared to be alive and well, and government activism was very much in vogue. Community groups, including Ralph Nader's organization, were aggressive in pressing their agendas.
Despite the political climate, the regulators had some very real concerns about CRA. Mindful of safety and soundness, they didn't want to press banks or thrifts to make marginal loans. They were also loathe to see CRA become a mechanism for allocating credit.
They had a sense of the limits of government and its proper role. They believed that decisions on which needs of the community should be addressed, as well as how, should be left to citizens of the community, not federal regulators, no matter how wise or well-intentioned they might be.
Finally, the regulators had an aversion to adding to the government-imposed burden of paperwork. Indeed, paperwork reduction was one of the Carter Administration's most trumpeted initiatives.
The regulations adopted in 1978 called upon banks and thrifts to delineate the communities they intended to serve. The regulations encouraged banks to engage in a dialogue with community groups to determine how the banks could best serve the needs of their communities.
Examiners were instructed to determine the reasonableness of a bank's performance record in serving its community but not to impose their own criteria on the bank. The enforcement mechanism, set forth very clearly in the law itself, was potential denial of expansion applications for banks perceived to be failing to address adequately the needs of their communities.
I think I understand the dynamics that gave rise to the current drive to reform the CRA regulations. The regulations were so balanced that no group, not banks and not community groups, was thrilled with them.
Banks became tired of CRA challenges in connection with their expansion applications. They wanted "safe-harbor" provisions to provide assurance they were in compliance and to encourage more consistent treatment by examiners. Community groups wanted more data to monitor bank performance and stronger enforcement by regulators than the threat of denial of expansion applications.
These wants were not new. They were expressed by these same groups in 1978 and were, wisely rejected. Satisfying them in 1994, if indeed they can be satisfied, will not make CRA a better law.
If there were no CRA, most banks would endeavor to serve the needs of their communities. They would do that because it is the right thing to do ethically, and it is in their best interests financially. A prosperous community results in stronger banks, and strong banks are critical to prosperity in the community.
Before CRA became the law of the land, it was believed by many that banks and community groups were not reaching out and talking to each other sufficiently. The CRA regulations were designed to encourage more outreach, and they accomplished their mission.
Democracies and marketplace economies are messy and sometimes very frustrating. But they consistently produce far better results than government-imposed directives. I believe the election returns in 1994 represent widespread voter acceptance of these simple truths. The financial regulators would be well advised to heed them.
Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and CEO of the Secura Group, a financial institutions consulting firm headquartered in Washington. D.C.
